Warren Buffett's Berkshire Hathaway invests in numerous artificial intelligence (AI) stocks. From its vast Apple holdings to non-tech companies such as Chevron, AI has an understated but positive effect on these companies and on the Berkshire portfolio.
Buffett and his team have also ventured into some high-growth AI stocks that could potentially bring outsized returns to shareholders. To this end, investors might want to take a closer look at two Berkshire-owned companies: Snowflake (SNOW 2.25%) and Ally Financial (ALLY 0.91%).
Snowflake
Snowflake has established a leadership position in the data cloud space. Thanks to its software, entities can store data, control updates, and apply their data as they see fit from one centralized, secure location. They can also accomplish this regardless of the cloud-infrastructure environment their data was gathered in, giving Snowflake a competitive edge over competing products from Amazon or Microsoft.
Admittedly, Buffett's team was probably thinking more about the data cloud's potential than AI when it acquired a pre-IPO position in Snowflake in 2020. Nonetheless, AI plays a critical role in supporting Snowflake, specifically with its Data Science & ML (machine learning) application. With the product's centralized data storage, Snowflake can help accelerate ML workflows and grant rapid access to a customer's data.
Also, through its Snowpark developer framework, the company can apply programming languages such as Python and SQL to perform data transformations. This approach can help clients create new ML-driven business insights.
These capabilities appear to increase interest in Snowflake's products. In the fourth quarter of fiscal 2023 (ended Jan. 31), revenue increased 54% year over year. This occurred as Snowflake increased its customer count over that period by 32% to 7,828.
Indeed, quarterly losses increased to $207 million as operating expenses continued to exceed revenue. Still, one could also argue now is the time to buy. Snowflake stock sells at a discount of about 55% from its November 2021 all-time high even after a 20% increase in the stock price over the last year.
While a price-to-sales (P/S) ratio of 27 may seem outlandish in today's tech environment, investors need to remember that Snowflake's sales multiple has never fallen below 20. The P/S ratio also reached a record 184 in late 2020, indicating how much the market has discounted that valuation. Hence, even with its sales multiple, Snowflake offers a compelling value proposition when considering its rapid growth and unique position within the data cloud
Ally Financial
At first glance, one might wonder how a company focused on loans and personal finance has much need for artificial intelligence. However, investors can find numerous examples of AI in finance, especially with a digital bank like Ally Financial. Ally experienced a significant metamorphosis when the former auto-lending arm of General Motors transformed itself into a digital bank.
Its branchless approach means almost all customer interactions occur online, and its dependence on technology arguably makes AI a necessity for the digital bank. Ally's former chief strategy and corporate development officer once described to American Banker one of its critical AI applications.
By using AI, Ally uses information gathered from other documents to help customers fill out auto-lending forms. This improves the customer experience while also increasing data accuracy. AI also powers a virtual assistant called Ally Assist to answer routine customer service questions without direct human involvement.
Virtual assistants do not seem to discourage customers from banking with or investing in Ally. Its $154 billion in total deposits in 2023's Q1 rose 11% year over year.
But despite that improvement, revenue for 2023's Q1 dropped by 2% year over year. Also, net income for the quarter came in at $319 million, down from $655 million one year ago. Profit fell as Ally increased its provision for credit losses to $446 million, up from $167 million in 2022's Q1.
Admittedly, Buffett's team trimmed its position slightly in that environment, reducing share counts by 3%. Nonetheless, with a 9.6% stake amounting to about 29 million shares, investors should not doubt Berkshire's commitment to or affinity with this stock.
Moreover, with its $1.20 per-share annual dividend, shareholders earn a 4.7% cash return. That likely return on top of potential stock-price growth should bolster confidence in the stock. Furthermore, even with the lower earnings, the price-to-earnings (P/E) ratio stands at 6, a level off its recent lows but down from 17 times earnings in early 2021. At such levels, investors can buy an AI stock inexpensively while earning a significant cash return, increasing the appeal of Ally's value proposition.
